Best Buy, Home Depot find tough times in China

Home Depot is no longer open for home improvements in Beijing. Best Buy Inc. decided its brand name electronics stores were not best for China.

This may well be the world's biggest and fastest growing consumer market, but foreign retailers are finding China is no easy sell as tough competition and a boom in online shopping prompt some big names to pack up or drastically alter their market strategy.

Minneapolis-based Best Buy opened its flagship store and other outlets in Shanghai just a few years ago, to great fanfare. This week it closed all nine of its brand name stores in China, stunning employees and customers: On Friday, hundreds of people were lined up outside the city's biggest store to seek help with returns and other customer services.

Best Buy says it plans to increase the number of its Five Star outlets _ acquired through the company's purchase of provincial retailer Jiangsu Five Star Appliance Co. in 2006 _ to about 210 by early 2012. It also is studying more profitable options for its Best Buy-branded outlets and plans to reopen two of them.

"We at Best Buy will not withdraw from the Chinese market. We will try to find new ways to develop," said a notice posted outside its flagship store in Shanghai's busy downtown Xujiahui shopping district.

Despite its expanded Five Star presence, shuttering the big blue outlets in some of Shanghai's choicest locations signals the company misjudged the local market, analysts say.

"My sense is that their first error was to use a model similar to the one they use in the U.S.," said Torsten Stocker, vice president of the consultancy Monitor Group. "Maybe their people were good at doing what Best Buy does back in America but not at operating a retailer in China."

Last month, Home Depot closed its last store in Beijing, one of several outlets shut down since 2009. The world's biggest home improvement retailer has retained outlets in some key provincial cities, where costs are presumably lower and competition perhaps less intense.

Meanwhile, regulators recently ordered up to 500,000 yuan ($75,900) in fines for hypermarket retailers Carrefour and Wal-Mart for over charging on items ranging from underwear to dumpling flour _ a sore point when authorities are jittery over inflation. Shanghai newspaper reports also criticized Carrefour, a French chain, of not paying its employees fair wages.

Some foreign retailers are thriving in China. KFC and Pizza Hut owner Yum Brands Inc. saw its annual operating profit surge 26 percent last year, pushing toward the $1 billion mark, thanks to the voracious Chinese appetite for western fast foods. The Shanghai outlets of foreign fashion retailers like H&M and Zara are often packed.

As Best Buy stages its strategic retreat from China's richest city, Apple Inc. reportedly plans a yet bigger shop right on Shanghai's famous Nanjing Rd. to help accommodate weekend crowds jammed into two recently opened spacious stores.

With incomes of many workers rising by more than 10 percent a year, China's growing affluence makes it a market few companies can afford to ignore. But hitting the right notes with Chinese consumers is crucial, and not always easy, analysts say.

Chinese customers balked at paying a premium for Best Buy's offer of a pleasant store experience and helpful service, including its Geek Squad computer troubleshooters, said Liu Hongjiao, a senior consultant with Analysys International Solution in Beijing.

While its competitors like Suning Appliance and its archrival Gome Electrical Appliances Holdings have suppliers that take payments after their products are sold, in Shanghai Best Buy had no such advantage. Add to that costs for labor and for retail space and the overhead was just not competitive, Liu said.

"Foreign companies are sometimes bolder than local ones, but the local companies know more about the local customers. They are better at controlling costs and keeping prices low," said Ding Wenjin, an analyst with Dongguan Securities in the southern city of Dongguan.

"Especially in these days of serious inflation, people are more sensitive about prices," Ding said.

In China, Best Buy has also been bested by local competitors in online sales in a market where, increasingly, purchases are done with the click of mouse.

From towels and T-shirts to microwaves and cell phones _ Chinese go online to comparison shop and then wait for their purchases to be sent, cash-on-delivery, straight to their homes or offices.

Online retail sales doubled in China last year from 2009, to 513.1 billion yuan ($77.7 billion), according to figures from the China E-commerce Research Center.

Of course, in a shopping-obsessed city like Shanghai, there is still plenty of retailing to be done: companies like Apple and Zara, which manufacture their own products, draw customers with their unique products, analysts say.

"Their market positioning is high, because their products are different from local brands," said Ding. "However, if you want to buy something like a Nokia cell phone, that's different. It will be the same whether it's from Best Buy, Suning or online," he said.